Bloomberg News

Anglo, ArcelorMittal Await S. African Iron-Ore Permit Ruling

December 14, 2011

(Updates with closing share prices in last paragraph.)

Dec. 14 (Bloomberg) -- A South African court will rule tomorrow on whether the state was correct to award a prospecting right over the country’s largest iron-ore mine to a company whose owners include a business partner of President Jacob Zuma’s son.

ArcelorMittal South Africa Ltd. in June joined Anglo American Plc unit Kumba Iron Ore in asking the North Gauteng High Court in Pretoria to overturn the award of a 21.4 percent right at the Sishen ore mine, previously held by ArcelorMittal South Africa, to closely held Imperial Crown Trading 289 (Pty) Ltd. ICT’s owners include Jagdish Parekh, a business partner of Zuma’s son, Duduzane. Kumba holds the rest of the Sishen right through Sishen Iron Ore Co., part-owned by Exxaro Resources Ltd.

“It will go against anyone’s logic if ICT gets the right,” Mohamed Kharva, an analyst at Nedgroup Securities Ltd., said by phone from Cape Town.

ArcelorMittal South Africa’s Sishen right lapsed after the Vanderbijlpark-based steelmaker failed to apply for a license by April 30, 2009, to satisfy a change in legislation.

The steelmaker’s failure to convert the permit caused a nine-year agreement to supply iron ore from Sishen at below- market prices to lapse, as the contract is linked to the mining right, Pretoria-based Kumba said. ArcelorMittal disputes this, saying in a February 2010 statement the contract was canceled. The agreement is subject to a separate arbitration process.

‘Untoward Behavior’

Kumba and Exxaro’s Sishen Iron Ore accused ICT of committing fraud in its prospecting-right application by illegally copying parts of Sishen’s own papers. Sishen also raised concern over the handling of the application by Department of Mineral Resources officials, who amended the mine areas and percentage of the right ICT applied for.

“The indications of possible untoward behavior within the DMR, of which there are strong indications in the facts before the court, is a concern,” Manus Booysen, partner at legal firm Webber Wentzel, said by phone from Johannesburg. The new act “places valuable mining resources in the hands of officials, and this paves the way for corruption.”

Ownership of South Africa’s mineral resources, previously held by mining companies or private landowners, reverted to the state when the new mining legislation was enacted in 2004, and is now allocated to companies by government officials on a first-come, first-served basis.

South Africa fell to 67th place out of 79 countries in the annual Fraser Institute rankings this year, which measures the attractiveness of governments’ mining policies, from 61st out of 72 countries last year.

Investor Confidence

“We keep slipping on that survey, which is an important measure of investors’ confidence in our country and its mineral law and administration,” Booysen said. “This is also of concern to the department and they have taken steps to address this. Time will tell whether those steps will be successful.”

Zingaphi Jakuja, a spokeswoman for the department of mineral resources, said by mobile phone the department is “not at liberty to comment” on the questions before the court.

Other companies embroiled in legal disputes over mineral rights include Lonmin Plc and Palabora Mining Co., which is owned by Rio Tinto Plc and Anglo American.

Rio Tinto sold its coal assets in the country to Coal of Africa Ltd. and is looking for a buyer for Palabora Mining. BHP Billiton Ltd., the world’s biggest mining company, said in January it would sell its undeveloped coal assets in South Africa to focus on existing operations.

Lapsed Deals

“Companies like BHP Billiton and Rio Tinto have been quietly getting rid of assets and have been going into neighboring countries,” Nedgroup’s Kharva said. “However you slice and dice it, the damage has already been done.”

ArcelorMittal’s proposed buyout of ICT for 800 million rand ($96 million), announced in August last year, lapsed on Aug. 12 after the parties failed to extend an agreement.

A second deal by ArcelorMittal to include Parekh and Duduzane Zuma as shareholders in a 9.1 billion-rand transaction was criticized by labor unions and institutional shareholders. This transaction, which was canceled in October, would have included members of the Gupta family of India, who are in partnership in a range of businesses with the president’s son.

Judge Raymond Zondo is expected to say whether separate companies may hold a proportional mining permit for the same mineral on the same property under the 2004 law.

Supply-Agreement Arbitration

Should Zondo rule tomorrow that the mining rights can be divided, as Kumba has argued, it would mean that ArcelorMittal failed by not converting its portion, making it more difficult for the steelmaker to win the arbitration into the supply agreement, Kharva said.

The accord gave ArcelorMittal access to 6.25 million metric tons of iron ore from Sishen annually at a discount of about $100 a ton compared with current international market prices of about $135 a ton.

If the division of rights isn’t allowed, as is part of ArcelorMittal’s case, it would mean Kumba already owns a 100 percent permit, placing ArcelorMittal in “a pretty good position” for the arbitration, Kharva said.

The arbitration will only go ahead once the court ruling and any appeals, which are likely, have been concluded, the companies said in separate statements last week.

ArcelorMittal said in a Dec. 9 statement that the arbitration would be rendered “academic” if it wins the court case. Kumba maintains the supply deal has lapsed and arbitration will need to go ahead, regardless of the judgment, according to an e-mailed response to questions.

Government ‘Remorse’

There will be government pressure on any new holder of the Sishen permit to provide discounted iron ore to domestic steelmakers as the state seeks to lower steel prices, Jean Pierre Verster, an analyst at 36ONE Asset Management (Pty) Ltd., said by phone from Johannesburg.

The supply-deal dispute prompted the Department of Trade and Industry to set up a task team to lower South African steel prices to the “lowest quartile” of global levels. The team’s findings haven’t yet been made public.

ArcelorMittal, facing various pricing investigations by the country’s antitrust authorities, said paying international prices for iron ore could force it to close its Saldanha steel plant, cut all exports and lose as many as 4,000 jobs.

At its peak, ArcelorMittal South Africa’s forerunner, state-owned Iscor Ltd., employed 70,000 people, seven times more than it does today.

“The issue shows government has remorse after selling control of Iscor to ArcelorMittal,” Verster said. “Government has been looking at a way to break the monopoly and lower the cost of steel in the local market.”

ArcelorMittal South Africa gained 0.4 percent to 60.26 rand by the close of trading in Johannesburg, narrowing its drop this year to 24 percent. Kumba slipped 0.7 percent to 495.95 rand, paring its gain this year to 17 percent. The benchmark FTSE/JSE Africa All Share Index retreated 1.5 percent.

--Editor: John Viljoen

To contact the reporter on this story: Jana Marais in Johannesburg at jmarais@bloomberg.net

To contact the editor responsible for this story: John Viljoen at jviljoen@bloomberg.net


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